IRS Hits Its Stride

Tax agency surmounts some of the biggest hurdles to updating its technology.

Todd Grams believes in second chances. When he assumed the duties of chief information officer at the Internal Revenue Service almost two years ago, he inherited a legacy of failure. The agency's hopeful plan to upgrade its core financial and technology systems, and thus bring tax processing into the age of the Internet, had come unglued-again. For years, the Business Systems Modernization program experienced delays and cost overruns.

The agency wanted to install a new internal auditing system, replace its decrepit master file of citizens' tax records and conduct a number of upgrades that, all told, would cost about $8 billion. The systems in need of replacement underpin the IRS' ability to collect trillions of dollars in tax revenue, and their failure portended a future so grim that an IRS oversight board called the faltering modernization "a risk to our national security."

"We were getting by day by day," Grams says. "Getting through the crisis was the success." Under financial pressure and scrutiny from Treasury Department overseers and Congress, Grams decided to scale back the modernization. He replaced the program's managerial staff, fundamentally changed the agency's relationship with its prime contractor, and now, just in time for tax season, he and his team apparently have resuscitated the program.

Grams is quick to list modernization's tangible successes in 2004, which he says is the program's best year to date. In October, his team got a new internal accounting system up and running to enhance the preparation of IRS financial statements. The system debuted over budget and a year late, but Grams says, that is an acceptable window, since most private sector implementations of the accounting software take more than two years. It is manufactured by the German firm SAP, whose U.S. headquarters is in Newtown Square, Pa.

The first release of another key modernization component, the Customer Account Data Engine, or CADE, was delivered last year, seven weeks ahead of schedule, by the modernization's primary contractor, Computer Sciences Corp. of El Segundo, Calif. CADE will replace the agency's master file of tax records, and this debut version will process 1040EZ tax returns this season.

Grams also touts the agency's seven electronic "services suites" now available to organizations. For instance, financial institutions can electronically check their customers' Social Security numbers against IRS records. Mismatching is a common problem that fouls up interest taxes, Grams says. And large companies and tax-exempt corporations can file returns electronically.

With the exception of the financial system, Grams says his team delivered all these components on time. Treasury Department auditors have questioned the progress, though, noting in a December 2004 report that Grams' team still lacks a formal method for measuring the success of modernization components. He is implementing those measures, but agrees there's still room for improvement, and he says, he's focused on the auditors' concerns.

A 22-year career federal employee, Grams has a big-picture perspective on a program that has defied experts' understanding of how a huge organization should fundamentally overhaul its technology systems and alter the way it does business. In the simplest terms, the IRS failed in the past because it bit off more than it could chew, Grams says. The portfolio of modernization projects was more than a third larger when he took over than it is now. The sheer scope of the program "exceeded our collective capacity to manage it," Grams concedes candidly.

The modernization managers didn't have the right skills for the job, Grams says. He isn't knocking their intelligence or their talents. The program managers were tax administrators by training, and while "superior ones," Grams says, they suffered because their expertise didn't match what the IRS needed to square the ambitious modernization. It was "not fair to these people" to assign them a job they didn't know how to do, he says.

When Grams took the CIO job in June 2003, six IRS employees were leading the modernization; one recently had come on board from the private sector. Grams changed that makeup, hand-picking corporate technology executives with experience managing large projects who were anxious for a new challenge, particularly one of this magnitude.

Today, the team is composed of five new hires from the corporate world and three longtime agency employees. Grams calls this the "perfect complement" of IRS executives, who know the agency, and outsiders, who understand sizable technology projects.

Grams also changed the modernization contract with CSC. In the past, the IRS had written cost-plus contracts-companies were reimbursed for what they spent, and earned fees on top of that. This meant contractors had little incentive to complete work on schedule, Grams says. IRS overseers criticized the way contracts were constructed, saying that companies weren't always held accountable.

Now, contracts have fixed-price ceilings, performance-based measures and set timetables, Grams says. The cost-plus-award style, in which fees fluctuate with the contract specifications, dominated modernization's early days. But as the program matured and IRS requirements were easier to nail down, failure to put more definitive orders in place became a financial risk, he says.

CSC is now fully engaged at the highest levels. Grams meets with IRS Commissioner Mark Everson and Computer Sciences president Michael Laphen every month for status reports. Each side knows it will fail without the other, so camaraderie has been born of necessity. "When you have two groups of people on a boat that's sinking, you don't want to argue about who bailed the most water yesterday," Grams says.

Even so, no one is saying the road to salvation has been smooth, or that the IRS has completely turned the corner. Congress cut the program's requested budget for fiscal 2005 by $80 million, settling on a $205 million allowance. Still, that amount is more than half the entire agency's spending package.

Grams seems motivated, at least in part, by a desire to prove modernization's doubters wrong. He would certainly command a higher salary in the private sector, and he'd likely spend a lot less time facing firing squads. But Grams says he's committed, and besides, he just can't find a job like this anywhere else: "I don't think I could get excited every day coming to work just to increase the bottom line."

The Year in Review

2004 was the best year yet for the IRS' troubled modernization program, says chief information officer Todd Grams. Here are some of the key achievements:

• Internal accounting system up and running.
• First release of Customer Account Data Engine, CADE, which replaces master file of tax records.
• Seven electronic "services suites" now available to assist organizations in tax matters.

Source: IRS